HH Discipline: A Necessary Condition For Successful Investing

A good friend, Sherman Doll, related the following story. Sherman has been a two-line sport kite flier for years. While not a pro, he has learned a few tricks from observing the flying behavior of these kites. He told me that one of the most difficult skills for beginners to master is what to do when their kite starts to plunge earthward.

Scared? Don’t pull on the kite or you’ll go flying!

The natural, panicky impulse is to yank backward on the lines. However, this action only accelerates the kite’s death spiral. The effective, kite-saving technique is to calmly step forward and thrust out your arms. This causes the kite’s downward acceleration to stop, allowing you to regain control and end its plunge.(1)

What does this have to do with investing?

As you likely know, the S&P 500 Index dropped 579 points from its closing high of 2,930 on September 20 to finish at 2,351 on December 24, a price drop (not including the return from dividends) of 19.8 percent — just short of the technical definition of a bear market, which is a loss of 20 percent. Combined with the weak performance of global equities over the same period, geopolitical turmoil in various corners of the world (including the risk of a trade war with China), President Trump’s attack on Federal Reserve Chairman Jerome Powell, and the government shutdown, the stomachs of many investors started to rumble.

Over the almost 25 years that I’ve been working with investors, I’ve learned that when we have situations like the one we’re in now, many people begin to “catastrophize.” They begin to focus solely on the negative news, ignoring all the good economic news.

For example:

  • Economic growth is strong. The Federal Reserve Bank of Philadelphia’s Fourth Quarter 2018 Survey of Professional Forecasters projects real GDP growth of 2.7 percent for 2019, down just slightly from the forecast of 2.9 percent for 2018.
  • Unemployment is at 3.7 percent, the lowest rate in 50 years.
  • Inflation is moderate. The Philadelphia Fed’s latest 2019 forecast is for an increase of 2.3 percent in the Consumer Price Index (CPI), down slightly from its forecast of 2.4 percent for 2018.
  • Consumer sentiment (a leading indicator) is strong. The final December University of Michigan Consumer Sentiment Survey came in at 98.3, remaining near the highest levels we have seen over the past 18 years (despite the recent weakness in stocks). The last time the Consumer Sentiment Index was consistently above 90.0 for at least as long was 1997 through 2000, when it recorded a four-year average of 105.3.
  • New claims for unemployment continue to be at very low levels. In the week ending December 22, the advance figure for seasonally adjusted initial claims was just 216,000.
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